Welcome to the new Becker-Posner Blog, maintained by the University of Chicago Law School.

12/03/2006

Student Loans--Posner's Comment

Generally, it is more efficient both socially and privately for the consumer, in this case the student, to pay the full cost of the goods and services that he buys than for the government to pick up any part of the tab. A student admitted to an elite college like Harvard and Yale has high expected lifetime earnings, and it seems absurd that the federal taxpayer should be required to defray a part of the cost of his education. This is not a point about distributive justice, for nowadays most federal income tax is paid by high-income individuals. It is a point about the inefficiency of using the federal tax and spending power to subsidize purchases by affluent (as measured by expected earnings over the recipient's lifetime) consumers. The inefficiency lies not only in the transaction costs associated with the subsidy (including lobbying expenses), but also and more importantly in distorting the allocation of resources. Suppose that for some marginal student the expected return from a college education, net of tuition and opportunity cost (the forgone income from working if the student attends college instead), is negative, but turns positive if his tuition expense is subsidized; then the subsidy is inducing a waste of resources.
This would be obvious if the subsidy were for a course in automobile repair, but maybe there is something special about college or university education that distinguishes it from other services, including other educational services. There are two arguments. One is that higher education (lower also, presumably) confers social benefits (that is, benefits not captured by the student), whether by making people more informed voters, or by making them more productive workers (assuming they cannot capture their entire contribution to social output in their wage), or by reducing subsidized health costs by increasing health (Becker notes that educated people are healthier than uneducated people).
This is not a good argument for a subsidy because it does not appear that many persons who would benefit from a college education fail to obtain one. As Becker points out, the private returns (higher earnings) from a college degree are very great and a student can borrow to finance the tuition and other costs of the degree. It seems unlikely, though it is not impossible, that kids who would not personally benefit from college nevertheless would, if paid to go to college, confer the social benefits of a college education that the students who do benefit personally might be thought to confer.
But the points I have made so far really argue just against increasing the existing subsidies for college education, rather than against any subsidies. College education is already heavily subsidized, notably in the case of state and city colleges, where the taxpayer picks up a big share of the cost; but private colleges receive various tax breaks, so they are subsidized too. (I would not call alumni donations "subsidies," however, since they are voluntary and give value to the donor.) Since a worker usually cannot recapture in his earnings the full effect of his labor on output (because he produces some consumer as well as producer surplus), and college increases the productivity of those students who are intelligent enough to benefit from a college education, there is an argument for making college affordable by any qualified applicant. However, it is unclear to me whether this requires any subsidies; all that is required is that the boost in expected earnings from attending college exceed the cost of the loans, or other costs, that the student must incur for college to be a rumerative choice. For then the student will be motivated to attend college even though his doing so will produce social as well as private benefits. All that is important from the motivational standpoint is that the private benefits exceed the private costs.
The second argument for subsidizing higher education is that its high cost nowadays, which for students who must borrow to pay tuition and living expenses forces them to go into debt, deflects students from nonremunerative jobs, such as (in the case of debt-written law students) public interest legal practice, or public school teaching, that (especially teaching) may confer substantial social benefits. (I doubt that public interest law practice does.) The students have too much debt to be able to pay it off without taking a high-paying job. However, a student loan subsidy is a clumsy device for channeling students into employment that is underpaid from a social standpoint, since every student gets the subsidy but only a handful are induced by it to enter the desired channel. It would be more efficient to raise the pay for the jobs that are thought to confer social benefits. A loan-forgiveness program, where forgiveness is conditioned on taking one of the favored jobs, is better tailored to the end of encouraging students to take such jobs than a loan subsidy; it operates to raise the full income of the job.
To repeat an earlier point, which tends to be neglected in discussions of the student-loan issue, if I am right that very few persons who could benefit from a college education are deterred by its cost, the main effect of increasing the subsidy will be to attract applicants who would not benefit if they weren't being "paid" to attend college. That would be a misallocation of resources.
I conclude that the case--for which I gather there will be support in the new Congress--for increasing the student-loan subsidy by having the federal government subsidize a larger part of the interest on the loan is a weak one.

Another consequence of subsidizing student loans is that it can shift the market for higher education by providing institutions the ability to fill their seats with the same talent-level of students at a higher price then they would otherwise be able to charge. A lot of students in non-technical fields complain that tuition is rising faster than inflation and professors' salaries without any perceivable change in their programs. With student loan subsidies widely available, Colleges, especially public ones, have less of a incentive to control costs than otherwise.

It's also worth asking why the real cost of higher education has inflated so rapidly over the last 25 years. New technology and infrastructure costs can be substantial (and so can those sports programs), but some courses of study make more use of expensive inputs than others. Student are often charged similar tuitions, but compare the costs of a program in English literature to a program in high-energy Physics. Why should it cost twice as much in real terms to read Chaucer or learn non-computation-intensive Mathematics, or study the German language as the near identical activity cost a short while ago?

I'm pretty shocked at all the anti-education subsidy people on here. If ever there was a good that conferred vast amounts of positive externalities, it is education.

Posner says, "This is not a good argument for a subsidy because it does not appear that many persons who would benefit from a college education fail to obtain one. As Becker points out, the private returns (higher earnings) from a college degree are very great and a student can borrow to finance the tuition and other costs of the degree. It seems unlikely, though it is not impossible, that kids who would not personally benefit from college nevertheless would, if paid to go to college, confer the social benefits of a college education that the students who do benefit personally might be thought to confer."

What is the source on the first point? How would you even begin to know this. Besides, this seems like a circular argument because it completely ignores the risk-reducing benefit of government intervention. Posner's argument seems to be: all the kids that can personally benefit from education are the ones already going to college. Those not going to college have decided they won't personally benefit and if they were given money to go, they wouldn't confer social benefit anyway.

... Doesn't that completely ignore the whole point of the subsidy? The subsidy is to make the marginal group of people - those who are CLOSE to benefitting, benefit from subsidized money to defray part of their cost and 30 years worth of interest on that cost. This defrays quite a bit of the risk involved with that investment too. So, at the margin, those kids that may not have thought it beneficial to go to college, may. with a subsidy, think it quite beneficial.

Posner's second point says that well, even if kids who get no benefit go, they won't convey the same social benefits as those already going (the unsubsidized benefiters). But that is an odd argument too because it, again, says that these marginal kids won't personally benefit - but of course they will (or they think they will) otherwise why would they go in the first place. But let's just assume they wouldn't benefit personally. There are social benefits that a college education provides that goes beyond that person that ANYONE that goes to college likely would pass on. Chief amongst these is the idea of generational benefits. I go to college. maybe it ends up not being very fruitful for me financially on average, but I now have 4 years of advanced culture, intelligence, and world appreciation, political involvement, etc that I can depart onto my children - something I can impart that I didn't have in my formative years. This environment might then foster an even greater upbringing for my child than I had - making the potential returns even greater for them, and so on and so on through the generations.

It is well documented the benefits of higher education is more than just a good future income: better health, more cultured and intelligent environment for children - which then imparts a higher probability that that child will go to college, and so on. The chances of an individual recognizing and accounting for those public benefits is small indeed, so why not subsidize it.

A student loan gives a student the benefit of funds in return for not having to expend the time to presently earn them, i.e., it is a grant of time more than money precisely when the student is in need of both. This is so attractive an opportunity that most--if not all--who wish to attend college do so irrespective of their finanacial circumstances. But having taxpayers fund greater amounts of money for student loans creates more of a false incentive whereby young people artifically extend adolescence into their early twenties (and later, should they enter a graduate or profesisonal school) pursuing a credential rather than entering the workforce and gaining experience. Isn't this a factor that should be considered viz. increasing taxpayer subsidized student loans?

I think that college tuition should be at least partially tax deductible. By creating a progressive percentage system where families with lower incomes can have more of their college tuiton deducted, I think Congress can create a very effective system. Although I agree than loans are not a tremendous burden, I think their effects cannot be overlooked. We live a country today that has seen immigration skyrocket, with an increasing supply of low skilled labor. As globalization takes root, and America sees a shift up in the deman for high skilled labor, I feel that it is necessary that Congress adjust its college education policy. America has been stubborn in not allowing high skilled foreign labor to enter the domestic market; the least Congress can do is provide an incentive to develop high skilled engineers and software designers here. There are many immigrant families that fall into a position where they have to choose between taking on a home mortgage or sending their children to college. It is simply financially unwise to take on both. If Congress can provide these middle class immigrants with an incentive to both educate their children and integrate themselves into American society by purchasing a home, I feel that the social benefits will tremendously outweigh the social costs.

The problem with widely available student loans is, as mentioned above, that they allow institutions to raise tuition beyond what they could charge in absence of such loans. Essentially, government-guaranteed or interest-capped loans increase a student's ability to pay and thus willingness to pay, and the schools simply respond by raising their prices to capture more of the consumer surplus.
Higher education certainly does confer externalities and it should be made possible for qualified students to get such education. But financing reform must include provisions that create incentives for colleges to keep costs and prices down, rather than to simply absorb any new aid that is made available.

Both Dr. Becker and Dr. Posner are both academic professors, so their conclusions may be colored with self interested. Just briefly...

That college degrees are financially valuable is perpetuated by the notion that college graduates will be valued by employers. The fact is that they are not.(exceptions include specialized and licensed degrees like law and medicine). Most employers look for experience, not grades, precisely because academic environments and their requirements for success rarely mirror corporate or entrepreneurial environments. Also, with the ease of access to the internet, and the flourishing of libraries and book stores (there is a Barnes and Noble book store on every street corner) and the relative democratization of information, formal education has become irrelevant.

Since the economic value of formal education has substantially decreased, while the costs have enormously increased,(due to deceptive marketing, the proliferation of for-profit universities, and an academic culture which values abstraction over practicality) it would be more reasonable to make colleges more selective, or make loans harder to come by, thereby removing the tax burden from society. This would also force schools to be more competitive and realistic, and pressure schools to get rid of gut courses, lunatic professors, and a tenure program which encourages complacency and pedantry.

You make the claim that education generates "vast amounts of positive externalities". Then, you don't support it.

Even your ending examples of generational benefits are internal - a person only passes these benefits on to his children.

Your entire argument hinges on the assumption that a college education generates significant positive externalities. This seems to be suspect, especially since (in the conversations I have had with professors) there is significant concern about the death of the liberal arts education (in the traditional sense). This is especially evident in the rapid growth of pure technical colleges such as the University of Phoenix.

I wonder at the assumption that college costs are so insignificant (after accounting for loans) that everyone who might benefit from college goes. As I remember, only a 4th of the relevant population (i.e. those older than 25) hold bachelor's degrees. I am not at all comfortable with saying that that 4th, and only that 4th, are exactly the ones who were "intelligent" enough to benefit from college degrees especially considering that education is so strongly correlated with parent's education.
I also wonder about the distribution of types of education among those who receive nominally equal education. Are engineering degrees from MIT and Southwest Missouri State really equivalent in terms of increased life-time income? If not, as I suspect, are the pre-existing difference between those who attend MIT and Southwest Missouri State ones of raw ability, which would justify different income, or of socioeconomic class, which would have the effect of rewarding students for having the good sense to be born to wealthy families. My intuition is that there is a bit of both effects. I wonder further think that selection by ability, not family wealth or influence, has improved in the last 50 or so years but is by no means perfect. I wonder if anyone has done work on this, whether it is possible to determine why students attend community college instead of the University of Chicago.
I also wonder if Professor Posner can expound on his comment that public interest lawyers have no beneficial effects for society. If the market has determined that a competent criminal defense lawyer costs $500 an hour and a lawyer working for legal aid can provide competent defense while making the equivalent of $25 per hour, someone is accruing a whole lot of surplus. If that someone is a defendant who is morally/factually innocent, I would not hesitate to label that consumer surplus a benefit to society.

I have never understood why free education through 12th grade is good but any thing past 12th grade should be paid for by students. What is special about 12 years of schooling? Foregoing income from work and working at school enough to get acceptable grades shows that a student values education. Maybe a better policy would be to spend less on students over 16 who will not study and more on those over 18 who will.

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Suppose that for some marginal student the expected return from a college education, net of tuition and opportunity cost (the forgone income from working if the student attends college instead), is negative, but turns positive if his tuition expense is subsidized; then the subsidy is inducing a waste of resources.

OK then. If you want to look at education purely as an investment yielding certain returns, perhapswe should be talking about taxing those returns the same way we tax other investment returns, like capital gains and dividends. That will make it much easier to repay loans.

College doesn‚Äôt have the payoff it once did. Graduate school today is what college was thirty years ago. We fully subsidize high school education and college has basically replaced high school in terms of value. Today, job market selection takes place by the Masters/JD/PhD criteria.

Our standards have changed. Why shouldn‚Äôt we treat college today like four/five more years of high school?

Look really hard at the computer screen, perhaps in the fuzzy static you can make out the faint image of me, and everyone else who ever voted for Ralph Nader, flipping you the bird. If an Article III judge gets to make snide comments like that then I say I get to respond in kind.

One comment mentioned that the price of tuition is closely tied to loan rates. This is of course true. Another fact, unlikely to be noticed here on a blog full of free-marketers, is that all three branches of the government have significantly changed the regulatory climate for student lending over the last few decades and especially the last few years:

Witness, changes to the bankruptcy laws to make student loans exempt from discharge.

Witness, the 2005 Bankruptcy Reform Act, further restricting discharge in ways that will cover all other borrowing, including for school.

Witness, the Supreme Court's 2005 ruling in Lockhart v. United States: Held: The United States may offset Social Security benefits to collect a student loan debt that has been outstanding for over 10 years.

Sallie Mae gets backstopped by the federal government every way possible. Including now special permission to garnish the previously ungarnishable Social Security. These are lobbied for and gleefully granted corporate subsidies.

If no one can default, Sallie Mae can loan you more. If Sallie Mae can loan you more, tuition goes up. When I graduated from engineering school in 1997, I had $15K in loans on a ten year term. When I graduate from law school this year, I will have $100K on a 30 year term. Instead of buying a home, I pay Sallie Mae.

And meanwhile, Posner and y'all go on about efficient consumption of educational units. Which by the way is a public good. And on this comment:

"You make the claim that education generates "vast amounts of positive externalities". Then, you don't support it."

That's funny. That claim was supported just as much as Posner's claim that educational externalities are small. Do you see how he tricked you? He mentioned a few externalities, then you assumed a smart guy like that had thought of them all. But that's OK, because even this blog is an externality of higher education, an exhaustive list would take all day.

In the end I concur in the judgment here that loan interest subsidies are bad. But on an entirely different rationale. Without price controls on tuition and with Sallie Mae's ability to extend repayment even into retirement, lower interest rates will just mean more borrowing, leading to higher tuition, leading to the Bankruptcy Reform Amendment of 2009 that makes Sallie Mae the executor of all wills of anyone who ever went to college.

Quick note before I, too, return to exams. Education, while it does bring many positive externalities, is not a public good. A public good is clearly defined as a non-rivalrous, non-exclusionary product or service. Education, especially college admission spots, are rivalrous: if I get one, that means there's one less for you. It is also exclusionary: it doesn't cost much in time or effort to exclude those who weren't admitted or didn't pay their tuition: just don't give them grades or a diploma or a dorm room.

Btw, price controls on tuition would just lower quality of education. And dorm rooms. But mostly education.

Haris; it looks as though you're studying econ and you spurred me to look up "public good" and find it an econ term perhaps first used by our old friend P. Samuelson who also said something to the effect of "not caring what the nation's laws were as long as he could design the economic laws."

Corey, our legal advisor appears to be using the public good as I would, as the sum of those two words pointing up the benefit to all from the actions of one, or the benefits to all from the actions of all or many.

Since we are discussing student loan burdens and the cost of college and in light of Samuelson's "design of the economic laws" we may as well get to the "cost relative to what" part of the statement. That is, as Posner claims, in some fields the cost benefit ratio is high; easy for a surgeon to pay off his loans, harder for a gen practitioner, and much harder yet for a saintly young teacher committed to returning to the barrio.

So it's not just the, absolute, cost of college and interest rates at issue but that of our rapidly growing income and wealth gap which makes these costs stick out like huge rocks at low tide for some and hardly be a problem at all for others. Thus....! here we are again, bumping into the question of transfer payments and "subsidies" to make it possible for, shall we say enough of our youth to go to college to give us a snowball's chance to compete in the global village and take care of our own affairs?

FWIW my guess is that college costs and even teaching K-12 and, for that matter, lawyering, will outpace inflation as they do not benefit from mass production or being done in low cost venues as are most of the things that "hold down inflation", and if energy costs double the same rooms still must be heated and cooled etc.

I'd like to complain about high salaries but most often end up thinking that most teachers and profs could do as well or much better in the business sector and that I should save my salary whining for pointing out that the compensation of one insurance co. CEO would pay the salaries of a whole dept in most colleges and that paying insurance premiums these days is a lot more onerous than a student loan.

someone said that "You make the claim that education generates "vast amounts of positive externalities". Then, you don't support it."

Of course I supported it. Besides health benefits that might not be internalized, the intergenerational benefits are also not necessarily internalized when the decision to school or not is made. Just because they are your kin does not make something an "internal" benefit. Education is correlated with a whole host of postive aspects such as political involvement, societal health, culture, in addition to exponential future productivity due to the increased human capital and 'knowlege' over the generations.

And while I agree that colleges may likely raise tuitions rates, it should be noted that those increased rates would effect EVERYONE. The subsidy would help those at the margin who likely would not go at all otherwise. So while it might cause the average collegegoer to pay a little more, this can be more than offset but increasing the pool that go in general, especially when taking into account the future benefits not only to themselves but to their kin and society and general which they might not even have an inkling about at the time of the decision.

Being in academic science, I imagine a future where, in the next few hundred years, humanity will transfer its consciousness to a giant computer in space. The collective consciousness of humanity will then devote itself to trying to understand the universe in sufficient detail to know whether humanity's existence has any purpose.With this future, it seems rather natural that society would, through government funding, support academic pursuits (particularly scientific research) at a high level. This high level of support could easily include government funding of education beyond high school.It is, of course, entirely possible that there is no purpose to humanity's existence. In this case, a purpose could be chosen arbitrarily. One could, for example, decide that the ethnic distribution across the planet was of supreme importance. One could engage in killing and destruction in order to achieve an outcome where some ethnic group or other predominated in some part of the world or other.One could also just engage in killing and destruction for for its own sake - because choosing an arbitrary goal and then killing and destroying to achieve that goal gives purpose to an otherwise meaningless existence.That seems to be the case currently. The USA spends much more on killing and destroying than it does on scientific research. The conflict in the Middle East is much more interesting to the American public than scientific progress. It is much more distressing to most Americans that they might be promoting college education than that they are promoting killing and destruction in Middle East.

(It appears a spam-bot named ajashi has circumvented your defense mechanisms. Time to ratchet up the protections).

Solid posts all. While many of you (who are quite well-educated) focus on the taxpayer-burden issue in arguing against further assistance to students in their borrowing and repayment of educational loans over time, and do so quite logically, Corey cogently exposes the reality: schools are ratcheting up tuition as Congress and the Courts increasingly protect Sallie Mae from student loan default. Combine that with the other painful reality for students, which Chairman Mao points out:

"Graduate school today is what college was thirty years ago. We fully subsidize high school education and college has basically replaced high school in terms of value. Today, job market selection takes place by the Masters/JD/PhD criteria."

Finally, we have the unavoidable correlation- statistically documented by Becker- between education and income over time.

Taken all together, we have a situation where people have to pursue higher education if they want to make decent money, but whose bachelor's degrees are all but useless in the current hiring environment, but who MUST pay the increasing cost of borrowing and higher tuition that the universities and lenders- who are fully aware of the hiring environment and the legal protections- gleefully impose.

So that's the crunch we're facing. Now, have earnings from higher education kept pace with the increases in tuition? That's the question that I need to see answered. It seems safe to say that college graduates make more money than non-college grads. But that's not the problem- the issue is whether or not earnings from education are outpacing the cost of obtaining education, especially in light of how hard it is to find the top, high-paying jobs that are often cited (law, finance and medicine).

Finally (addressing the circularity of relying on an assessment of the taxpayer burden as a reason against further student loan subsidization), it needs to be re-noted b/c I'm not the first person in this discussion to say it that the taxpayers who pay the lion's share of tax are the high-wage earners, the college-educated professionals. If they have more than 100k in grad school debt, they're probably in the 28-33% bracket. This tax break is for them, the ones who, now working like dogs paying back public and private loans at 10.5%, are wondering why they ever got their fancy education in the first place.

I like Posner, but I am definitely far from impressed with his poor analysis here.

First, Posner asserts the following: "This is not a good argument for a subsidy because it does not appear that many persons who would benefit from a college education fail to obtain one."

Oh really? I know many anecdotes to the contrary.

Many people who do go to college are no more intelligent or capable than those who do not. Indeed, in many cases, they are less intelligent and capable. I speak from experience.

Do the people who go to college do so because the have rationally calculated the income benefit? In some cases, yes. But in many cases, no. People often go to college because it is a social expectation, rather than some "rational" calculation. They nonetheless come out with much better paying jobs and benefit from the experience. Unfortunately, we don't get to choose our parents, so, not all of us are pressured into furthering our education.

Why do others not go to college? Often, it is due to inadequate social expectations and peer influence.

I think what Posner takes for granted is that enormous effect those around you have on your decisions.

Further, it should be noted that a lot of people have an irrational aversion to debt. I knew people in college who insisted on working rather than going into debt. Even if this meant signficiant interruptions to their studies. Even though the costs of working, in terms of interruptions and decreased grades, definitely hurt their long-time earnings more than debt would. Does it make more sense to earn $6 an hour on some job, or go into debt and earn $25 when you graduate? Obviously, debt is more rational, but people OFTEN are not rational. They make decisions based on what people have taught them. One thing that is often taught is that DEBT IS BAD.

In general, a lot of people also do not go to college because they THINK they cannot afford it. That is, they are not aware of the financial aid available to them and simply believe what they have been told by others.

In general, we as a country benefit greatly by the education level of those around us. The more people who go on to learn, say, bioinformatics, the more drugs that will be invented that will help us with health. Also, we should not forget the valuable social capital that is formed, which is in turn passed onto kids.

Overall, I think Posner's assertion that there is not much to be gained by getting more individuals who currently do not get a college education, whether through ignorance, lack of social capital is based on ignorance.

With all due respect, Posner is too entrenched in his elite world to really understand what he is talking about here. To evaluate whether people who do not get a college education could benefit from one, you really need to get to know those people, not just sit in some office somewhere pontificating on the point.

If people were merely focused on economics, and they really did whatever they could to maximize lifetime earnings, regardless of socioeconomic background, then Posner would have a point. But this really is not reality. Whether you go to college has much to do with whether your peers go to college, whether your parents encourage, and many other non-economic factors. That is the real world. Other models are just fantasy.

Another way of looking at the tuition problem is to see it as a correction of information asymmetry between employers and job applications. That is, it's the classic lemon problem.

Not everyone is created equal. Some people are more talented at a job than others. In the market, employers have a difficult time in figuring out how to separate the good applicants from the bad ones (lemons).

However, a good applicant knows she is better than her peers and needs to signal this to employers somehow. One way to do so is the willingness to incur debt. The greater the willingness to incur debt, the greater the show of confidence that that individual has in being able to repay the debt. That is, she knows she'll be able to pay back her debt and is signalling her confidence to the market.

On the other hand, the bad applicant has fear that she will be able to pay back her debt. She is unwilling to participate in an arms race against the good applicant, because she believes she will eventually lose.

Thus, having this information signal, employers will be willing to offer higher paying salaries as the premium for access to this information.

Unfortunately, instead of an equilibrium developing between good applicants/bad applicants/employers, we have a vicious cycle. Easy access to credit encourages bad applicants to take on more risk in hopes of being mistakenly identified as a good applicant. This degrades the quality of information in the signal. In turn, good applicants have to take on higher debt to stand out.

Perhaps one solution, albeit a politically unpopular one, would be to make access to educational credit funds more difficult.

I want to add that after good applicants take on higher debt, they are at a point past that which employers are willing to pay for access to the information correction problem. That's the situation we have today. Good applicants and bad applicants have maxed out the employers ableness to pay for this information signal.

I am a recent college graduate and can afford to pay off the full amount of my loan right now. I am not doing it though because the rate on my subsidized loan is very low. Instead, I have the money invested and I am earning the difference between the market rate on the student rate. Additionally, the interest is tax deductible, even better.